Alexander Group Rule of Five Series for Higher Growth and Profitability

First Rule: Keep Seller-to-Sales Manager Ratios below 10:1

Smart manufacturers and distributors are making bold investments in solution offerings and operations, but few have yet to deploy the full power of commercial models to drive higher long-term valuation.

Driving Value: Alexander Group Rule of Five

Leveraging higher growth and profitability.

Alexander Group extensive and timely research indicates that manufacturers and distributors who adhere to the “Rule of Five” valuation model can consistently outpace competitors and enjoy premium valuations. Based on over 100 interviews with leading executives, revenue-focused client projects, and industry research using hundreds of datasets, here are five key rules that will unlock the power of your commercial model. Part 1 of this series will focus on the first rule in detail. The others will be explored in subsequent articles.

What are the five rules of above-market valuation?

1. Front-line Sales Managers per Core Field Seller
2. Percent of Revenue from New Products
3. Percent of Revenue Invested in Digital Tools for Commercial Functions
4. Core Sales Team Attrition Rate
5. Sales-to-Revenue Operations Resource per Core Field Sellers

1. Front-line Sales Managers per Core Field Seller

Target: <10:1

In an uncertain business environment, some companies choose to cut budgets, adopt a “wait and see” approach, and stop investing in sales team oversight. Those companies have sales managers with too many field sellers, leaving little time for strategy, direction and supervision. High ratios of greater than 10:1 significantly inhibit proactive selling, while low ratios (less than 5:1) can increase expenses and may be tied to immature player/coach selling models.

Alexander Group research indicates that companies who optimize their manager-to-seller ratio provide improved oversight and training while leveraging selling opportunities. Cross-functional collaboration, proactive customer outreach and strategy execution are ways that sales managers add value, providing the guidance needed to expand both revenue and growth.

The positive effects of lower sales manager ratios are profound. Companies with ratios of 10 or fewer sellers per manager see:

• Almost 2% higher growth (1.9% versus .1%)
• 8% higher gross margins (41% versus 33%)
• $2.4M higher sales per core seller ($12.4M versus $9.0M)

Companies with higher spans of control outperform in only one category, expense to revenue ratios, spending 0.6% less in overall sales expense (5.8% versus 6.4%). However, this savings is too short-sighted and heavily outweighed by lower productivity, growth and gross margins.

How to Get There

Your first priority as a commercial executive should be bolstering your front-line sales management. You can take the following steps to optimize your seller-to-manager ratio:

1. Map your organization and gain a true understanding of how many resources each sales manager is covering. You may think it’s only five or six, but it could be significantly higher if they support multiple channels, overlays and support resources.
2. Assess the true job profile and skill set of your sales managers. Do you have an overabundance of player/coaches or office jockeys, who never get out in the field?
3. Set up a talent and development program for sales managers. Know exactly how many you need to hire, where to source them (internal/external), and how to equip them to succeed long-term.
4. Hire up and get to at least a 10:1 ratio of fully dedicated, highly skilled and motivated sales managers who will easily help capture above-market growth and margins.

I recall a past engagement where I told a new commercial leader that his main issue in a severely underperforming company was the lack of sales managers. He needed 12 or so to get to a 10:1 ratio. He hired 20 and brought double-digit growth to a company that had flat sales for five years straight.

Part 2 of this five-part series will highlight how to use the percent of revenue from new products as a driver for above-market valuation. For more information on how you can generate higher growth and profitability, please contact an Alexander Group manufacturing and distribution practice leader.

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